Contact us   Feedback   Annual Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2015 (11) TMI 997 - ITAT MUMBAI

2015 (11) TMI 997 - ITAT MUMBAI - TMI - Disallowance of depreciation on tenancy rights - Held that:- Since the Tribunal has consistently decided this issue against the assessee over the years and none of the orders of the Tribunal has been shown to have been either reversed or stayed on appeal, respectfully following the said earlier Tribunal orders, this issue is decided against the assessee for the year under consideration confirming the disallowance made by the AO on account of assessee’s cla .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

is wide sweeping, but wrong observation. - Held that:- Apropos the applicability or otherwise of section 40(b) of the Act to the facts of the year under consideration, it cannot be disputed that the amount in question is not at all income of the firm, having been diverted by the overriding title of the charge stipulated by the relevant clauses of the partnership deed. - Decided in favor of assessee.

Disallowance made u/s 14A read with Rule 8D - Held that:- The assessee’s argument of n .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

be paid by way of the price of the share of the outgoing partner in the partnership. This is the material point of difference between the facts herein and those attending “V.G. Bhuta” (1993 (3) TMI 79 - BOMBAY High Court). The Ld. CIT(A) correctly confirmed the addition. - Decided against assessee. - I.T.A. Nos. 7324 & 1014/Mum/2013 - Dated:- 7-10-2015 - SH. A.D. JAIN, JUDICIAL MEMBER AND SH. N.K. BILLAIYA, ACCOUNTANT MEMBER For The Appellant : Sh. Hiro Rai, For The Respondent :Sh. G.M. Doss, Sr .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

disallowance of depreciation on tenancy rights: 1. The Ld. CIT(A) was not justified in confirming the Assessing Officer s action of disallowance of depreciation on tenancy rights of ₹ 20,38,268/-. 2. The Ld. CIT(A) was wrong in concluding that tenancy rights did not fall within the block of intangible assets. 3. The Ld. CIT(A) failed to appreciate that tenancy rights were a form of licence. As regard addition of payment to Retired Partner 4. The Ld. CIT(A) erred in confirming addition of p .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of diversion of income by overriding title. As regards disallowance u/s 14A 8. The Ld. CIT(A) erred in upholding disallowance of ₹ 1,21,915 under section 14A read with rule 8D. 9. The Ld. CIT(A) failed to appreciate that no expenditure had been incurred to earn the relevant exempt income and that therefore no disallowance was warranted. 10. Appellants pray that the order of the Ld. CIT(A) be modified by: a. allowing depreciation of ₹ 20,38,268 on tenancy rights; b. deleting addition .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cy rights of ₹ 11,46,525/-. 2. The Ld. CIT(A) was wrong in concluding that tenancy rights did not fall within the block of intangible assets. 3. The Ld. CIT(A) failed to appreciate that tenancy rights were a form of licence. As regard addition of payment to Retired Partner 4. The Ld. CIT(A) erred in confirming addition of payment made to a retired partner of ₹ 10,74,36,715/- in terms of the partnership deed. 5. The Ld. CIT(A) failed to appreciate that such payment was diverted by ove .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ts; b. deleting addition of payment to legal heirs of deceased partner of ₹ 10,74,36,715/-. Appellants crave leave to add to, alter or delete any of the above grounds, if any when necessary. ITA No.7342/Mum/2013 for the assessment year 2007-08. 4. The facts as per the record are that the AO found the assessee to be occupying the second floor of N.M. Wadia Building, 123, M.G.Road, Fort, Mumbai as a tenant, for many decades. The building is owned by the N.M. Wadia Charities Trust. None of th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

08.2009 were filed before the AO. The AO examined the submissions of the assessee and referred to the provisions of section 2(11)(b) of the Income Tax Act, which deals with intangible assets. The AO also noted that this was a recurring issue, regarding which, the assessee s appeal for the assessment years 2003-04 and 2004-05 had been dismissed by the ld. CIT(A). The AO, thus, disallowed the claim of depreciation on tenancy rights. 6. Before the Ld. CIT(A), the assessee submitted that though tena .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nt from the ownership of tenancy rights; that since the assessee had claimed depreciation on tenancy rights and not depreciation on immovable property, what was required was the ownership of the tenancy rights and not the ownership of immovable property; that the assessee was the owner of intangible assets being tenancy rights, since tenancy rights are recognized by law and the assessee was free to deal with the tenancy rights as it chose, subject to the provisions of law; and that the disallowa .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

in favour of the Department by the Tribunal in the assessee s own case for the assessment years 2006-07 & 2008-09 also, i.e., for the immediately preceding and the immediately succeeding years too. It has, however, been contended that the assessee s appeals stand admitted before the Hon ble High Court on this issue. 9. The Ld. DR, on the other hand, has strongly relied on the impugned order in this regard. 10. Since the Tribunal has consistently decided this issue against the assessee over .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

arguments of both the sides and also perused the relevant material on record. The ld. counsel for the assessee has fairly and frankly conceded that the common issue involved in these appeals is squarely covered against the assessee and in favour of the Revenue by the decision of the Tribunal rendered in assessee s own case for assessment years 2003-04 & 2004-05 vide its order dated 29th Oct., 2009 passed in ITA Nos. 355 & 356/Mum/2008 wherein the orders of the learned CIT(Appeals) confi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

O on account of depreciation claimed by the assessee on tenancy rights. 11. Accordingly Ground nos. 1 to 3 are rejected. 12. Coming to Ground nos. 4 to 7, the AO made addition of ₹ 3,69,45,176/-, being payment made to a retired partner. The facts as per record are that on verification of the assessee s Income and Expenditure account, the AO found the assessee having debited an amount of ₹ 3,69,45,176/-, being contractual payment made to a retired partner, namely, Sh. Nihar A. Mody, i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

progress on account of the fact that the work had not reached a stage of completion, where the client could be charged for it. The assessee contended that these were rough and ready measures to compensate the outgoing partner for his share of those profits of the firm, related to the period during which he was a partner of the firm, which profits had not been realized by the firm on account of the fact that assets had not been sold, or on account of clients not having been billed for the work-in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n the year of receipt. It was contended that it was a case of diversion of income by overriding title, as under Clause 23.10 of the partnership deed, the payment under Clause 23.5 was charged on the assets of the firm, while the payment under Clause 23.7 was a charge on the receipts, profits and assets of the firm. It was pointed out that such amount had accrued and was payable to the outgoing partner on the death or retirement, irrespective of whether the firm made a profit or not in the subseq .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the deed of retirement to pay erstwhile partners in respect of fees realized after their retirement, it is a case of the source of income being subjected to an obligation and payment of such fees to the retiring partners is not assessable as income of the firm. It was further pointed out that the ratio of the decision of the Mumbai Bench of the Tribunal in the case of S.B. Billimoria & Co. vs. ACIT , 317 ITR (AT) 203 did not apply to the facts of the assessee s case and in that case, the dec .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the present assessee, the amount stood determined at the time of retirement of the partner. It was stated that the payment by the assessee to the retiring partner was a case of diversion of income by overriding title, and not of sharing of future profits and it was, therefore, not includible in the income of the firm. 13. However, the AO did not agree with the stand taken by the assessee. The payment of ₹ 3,69,45,176/- made by the assessee to the retired partner was disallowed. While doin .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ssessee-firm had created a liability and paid certain amounts to the retiring partner, which was defeating the intention of the legislature and as such, the Clause superseded the provisions of the Income tax Act itself. It was observed that since the payment made to the retired partner of the firm was not within the scope of any of the provisions of the Act, such payment could not be said to have been incurred for earning income of the partner. It was observed that the payments were planned by w .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

not be diversion by overriding charge, but it was a pure case of application of fund. 14. By virtue of the impugned order, the ld. CIT(A) confirmed the disallowance. While doing so, it was observed as follows: A perusal of income and expenditure account indicates that the appellant has debited ₹ 3,69,45,176/- being contractual retirement payment made to a retired partner in terms of clause 22 of the partnership deed, as Shri Nihar A Mody retired prior to the year under consideration. In v .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

factual situation of the decision on which reliance is placed. It has also been held in Padmasundra Rao v. State of TN that circumstantial flexibility, e.g. one additional or different fact, may make a world of difference between conclusion in two cases. On a conspectus of the factual scenario, the case of the appellant-company is distinguishable from the cases relied on by the learned A/R. Therefore, the payment made to persons other than working partner is not eligible for deduction from incom .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

yments for business expediency i.e. to retain its partner and the payments were in the nature of incentive. This cannot be an example of diversion by an overriding charge. It is clear case of application of fund. In view of the above, the disallowance of ₹ 3,69,45,176/- made by the AO in respect of payment to the retired partner is confirmed. 15. Before us, the ld. counsel for the assessee has maintained the stand taken by the assessee before the authorities below, contending that the paym .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

retirement of the partner after he ceased to be a working partner, the provisions of section 40(b) of the Act do not apply, the partner no longer being one when the amount became due to him; that the payment is a case of diversion of income by overriding title by virtue of pre-fixed stipulation in the partnership deed; that it is not a case of application of funds; that the payment was primarily made in order to compensate the retiring partner for the work in progress, which could be completed .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

clients; that the tax was paid by the recipients on the same amount; that even as per CIT vs. Subramaniam Brothers , 236 ITR 148 (Mad), where the payment is an obligation as per the relevant clauses of the partnership deed, the amount paid is not assessable in the hands of the firm, it having been diverted by overriding title before it reached the firm; that the AO has himself observed that the payment was made for business purposes; that if it is so, it needs to be allowed subject to the limit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

hip deed creating liability to pay certain amount to the retiring partner is defeating the intention of the legislature and thus, the clause supersedes the provisions of the Income-tax Act itself, is not only whimsical, but also fanciful; and that there is no basis for this wide sweeping, but wrong observation. 16. Per contra, relying on the impugned order on this issue, the ld. DR has contended that the assessee has miserably failed to prove on record any services rendered by the outgoing partn .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

red by the Hon ble Bombay High Court, i.e., the jurisdictional High Court so far as regards the assessee; that therefore, the payment is of capital nature; that the payment is an application of income and not expenditure diverted by any overriding charge; and that it is only a gratuitous payment. 17. In this regard, apropos the applicability or otherwise of section 40(b) of the Act to the facts of the year under consideration, it cannot be disputed that the amount in question is not at all incom .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ns of section 40(b) of the Act. Moreover, in V.G. Bhuta (supra),the payment was optional, which is not so herein, having been circumscribed by the mandatory clauses of the partnership deed. 18. For the above discussion, we do not find the order of the ld. CIT(A) on this issue to be sustainable in the eye of law. The same is, as such, set aside. Ground nos. 4 to 7 taken by the assessee are, accordingly, accepted. 19. Now turning to Ground nos. 8 & 9, the ld. CIT(A) upheld the disallowance of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

7; 6,50,750/- in tax-free bonds of a Government company; that these bonds matured during the year under consideration and an amount of ₹ 1,00,69,821/- was invested in the month of March, 2007 in units of liquid scheme of mutual funds; that this was a temporary deployment of surplus funds till such time as the funds were required for meeting expenses; that during the year, the assessee earned interest income of ₹ 55,519/- on the tax-free bonds and ₹ 69,821/- as income on mutual .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ly calculated the disallowance. Finding no error therein, the action of the ld. CIT(A) in confirming this disallowance is upheld. Accordingly, Ground nos. 8 & 9 are rejected. 23. Ground no.10 stands answered by our findings on Ground nos. 1 to 3, 4 to 7 and 8 to 9. 24. The Grounds of Appeal in ITA No.7324/M/2013 for A.Y.2007-08 are, therefore, partly accepted, as above. ITA No.1014/Mum/2013 for the assessment year 2009-10 25. Ground nos. 1 to 3 pertain to the assessee s claim of depreciation .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

deceased partner, Sh. Anand Bhatt. The facts as per record are that on query, the assessee submitted before the AO as follows: a) The amount paid is ₹ 10,86,62,744/- paid to legal heirs of a deceased partner Sh. Anand Bhatt, less ₹ 12,26,029/- which is reduction of amount payable to retire partner Shri Nihar Mody on account of write-off of outstanding client accounts. b) On 26 November, 2008, Sh. Anand Bhat, one of the main partners of the firm, lost his life in the terrorist attack .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

utgoing partner in respect of appreciation in the value of immovable properties held by the firm to the extent of his share, where a rough estimate is made of the market value of the immovable properties, the appreciation is discounted by 50%. d) Clause 23:7 for payments to retired partners; Legal heirs of deceased partner has been made in order to compensate the outgoing partner for work done during the period of partnership which has not accrued to the firm during that period…the paymen .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ceased partner pay tax on such amounts received by them from the firm u/s 176(4) of the year of receipt. f) Legal heir of Mr. Anand Bhatt, Mrs. Meena Bhatt has paid taxes on the amounts received by her in the years in which such amounts were received by her. We enclose a copy of computation of income of Mrs. Meena Bhatt for AY 2011-12 alongwith acknowledgment of return of income….balance amount is likely to be received by her during the current financial year and the following year. g) It .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

agree with the stand taken by the assessee. The payment made by the assessee was disallowed. While doing so, the AO observed from the facts available on record in the assessee s case, it was quite manifest that all income by way of profession or otherwise had reached it without interruption and the assessee had applied the same for the payment in question, after having received such income; that as regards the assessee s reliance on the decision of the Hon ble High Court in the cases of Mulla & .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

arisen, or had been received, amounted merely to the apportionment of the income, and not diversion; that this principle has been laid down in the cases of Raja Bejoy Singh Dadhuria v/s. CIT (1993) [ITR 135 (PC)], P.C. Mullick Vs. CIT (1938) [6 ITR206 (PC)], CIT vs. Sitaldas Tirathdas (1961 [41 ITr 367 (SC)], CIT vs Imperial Chemicals Industries (1996) [74 ITR 17 (SC)] and CIT v/s Travancore Sugars & Chemicals Ltd. (1973)[ 90 ITR 307 (Ker)]; that thus, where income accrues to the assessee d .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ination or disposal, or what happens afterwards; that no treatment meted out to an income after it has accrued or arisen can affect its liability to be taxed [MK Brothers P. Ltd, V/s CIT (1967) [63 ITR 28, 34 (All)], affirmed in (1972) [86 ITR 38 (SC)]; that in order to decide whether a particular disbursement amounts to diversion or application of income, the true test is to probe into, and decide, whether the amount sought to be deducted, in truth, did not or did reach the assessee as his own .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

by any stretch of imagination. The payment made to retired/ deceased partners was not business expenditure. The assessee is not entitled to enter into contract or agreement that artificially reduces its taxable income. The decision of Mumbai High Court in the case of V.G. Krishnamurthy (203 ITR 249) is squarely applicable in this case. Further, in view of the amendment with effect from 1.4.1993, only the working partners of the firm are entitled to receive remuneration and interest from the reg .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d clause supercedes the provisions of the I.T. Act, 1961 itself. Since the payment made to the retired/legal heirs to deceased partners of the firm is not within the scope of any provisions of I-T Act, the same cannot be claimed as an expense. In this respect, reliance is placed on the decision of the Hon ble Bombay High Court in the case CIT V/s. Bhutta (203 ITR 249) wherein it is held that payment relating to period prior to the accounting year is not deductible in any case. Further, partnersh .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

at in another way. Retirement of partner leads to change in profit sharing ration. The profit, which can be shared, is only a post tax profit. Hence, payment to retiring partner/legal heir of a deceased partner cannot be set up as an expense against the profits of the firm. Basically what can be expensed to find out profit are the amounts which were expended to earn the gross income from which the deduction is now claimed. That the payment to retiring partner/legal heir of a deceased partner is .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tain future event. The case of CIT vs. AN Naik & others , 265 ITR 346 (Bom) deals with distribution of capital assets to retiring partners/legal heir of a deceased partner, which is treated as being eligible to capital gains in the hands of the firm. The case of CIT vs. Mulla & Mulla & Carigie Blunt & Core reported in 190 ITR 198 (Mom) on which the assessee has relied upon pertains to A.Y. 1969-70 much before the amendment effective from 01.04.1993. This case is illustrative of p .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

a firm is expected to function on the basis of the Partnership Act, but as far as taxability is concerned, the provisions of I.T. Act would take precedence. The issue in hand is to determine whether it was an application of fund or a diversion by an overriding charge so far as taxation is concerned. The Hon ble Supreme Court had set the law clear in this regard in the case of CIT vs. Sitaldas Tirathdas 41 ITR 367. The payments to partners are governed under the Partnership Act read with the Inc .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e, on this count also, the assessee s contention is rejected. Therefore, on consideration of such facts and circumstances, the payment of ₹ 10,74,36,715/- made to the retired/deceased partners is disallowed and added to the income. 28. The Ld. CIT(A) confirmed the addition. 29. Before us, on behalf of the assessee, it has been contended that the payment in question was entirely in accordance with the partnership deed, as per which, once a partner dies or retires, the payment is an obligati .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

say that it is after accrual of the income that the expenditure is met by the assessee. It has further been contended that the ld. CIT(A) has also erred in observing that the payments made to the legal heirs of the deceased partner have nothing to do with the services rendered to the client; that in fact, the payments made are in respect of work done which has not yet reached a stage of billing; and that the payment definitely is in respect of the services rendered to the clients. It has been su .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ee-firm, whereas, in fact, the outgoing partner was separately paid towards the balances in his capital account, current account, loan account, appreciation in immovable property and goodwill. It has been contended that the legal heirs of the deceased partner were paid what was due to the deceased partner and no payment was made for taking over his share. The case laws relied on by the ld. CIT(A) have been distinguished. 30. On the other hand, the ld. DR has sought to place strong reliance on th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nder consideration is an application of fund and not of diversion by overriding charge. It has been contended that even otherwise, the payment having been made by the assessee for business expediency, it is not an instance of diversion by overriding charge. 31. We have heard the parties and have perused the material available on record with regard to this issue. Coming straightway to the decision of the Hon ble Supreme Court in the case of CIT vs. Sitaldas Tirathdas reported at 41 ITR 367(SC), i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

was under a personal and legal obligation to maintain; and that the Income tax Act does not permit of any deduction from the total income in such cases. On a reference, relying on Seth Motilal Manekchand vs. CIT , (1957) 31 ITR 735 (Bom) and Prince Khanderao Gaekwar of Baroda vs. CIT , (1948) 16 ITR 294 (Bom.), the Hon ble High Court held that as there was an obligation on the assessee to pay, even though there was no specific charge on the property, it could be enforced in a court of law. It w .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the matter in an appeal before the Hon ble Supreme Court. It also challenged the decision of the Hon ble Bombay High Court in Seth Motilal Manekchand vs. CIT (supra) and Prince Khanderao Gaekwar of Baroda vs. CIT (supra). 32. Their lordships of the Hon ble Supreme Court, after noticing numerous decisions on the issue, including those named hereinabove, observed that the true test for the application of the rule of diversion of income by way of an overriding charge, is whether the amount sought t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

see, it is deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It was observed that it is the payment of first kind, i.e., payment made under obligation, and not of the second, which can be excused. It was observed that the second payment is merely an obligation to pay another portion of one s own income, which has been received and is since applied. It was observed that the f .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e income to discharge an obligation and not a case in which by an overriding charge, the assessee became only a collector of another s income. It was observed that the matter would have been different, if such an overriding charge had existed either on the property, or on its income, but it was not so. It was held that the case fell outside the rule in Raja Bejoy Singh Dadhuria vs. CIT (supra), as per which, there was a charge for maintenance created against the assessee and the Privy Council ha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ial Committee confirmed the decision of the Hon ble Calcutta High Court disallowing the deduction. It was observed that the payments were made out of the income of the estate coming to the hands of the executors and in pursuance of an obligation imposed upon them by the testator. It was observed that it was not a case in which a portion of the income had been diverted by an overriding title from the person who would have received it otherwise. Thus, though the assessee claimed so, the rule in Ra .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

. CIT(A), Clause 23:1 to 23:4 of the relevant partnership deed read as follows: 23:1 The partner whose share is determined under clause 22 hereinabove is hereinafter referred to as Such Partner . The determination under clause 22 hereinabove shall not dissolve the partnership. The determination shall be without prejudice to the remedies, if any, of the continuing partners for any breach or breaches of covenants by Such Partner before the determination of his/her share. 23:2 Such partner whose sh .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

representatives, as the case may be, the following amounts: a) the fixed capitals standing to the credit/debit of Such Partner. b) the amount standing to the credit/debit of his/her current account after adjusting his/her share in the profits of the partnership up to the date of determination of his share after deducting tax liability payable by the firm and taking into account drawings of withdrawals made by Such partner as entered in the current account of such partner, and c) the amount stan .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

f all the immovable properties of the firm described in Schedule I and/or Schedule II hereto shall be determined. In determining such difference, the values arrived at by the Principal Partners shall be conclusive and binding on Such Partner, his/her representatives and all the Other Partners. (b) The amount computed under sub-clause (a) shall be discounted by 50%. (c) Such Partner or his/her representative shall be entitled to receive his/her share in the amount arrived at under clause (b) abov .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ination of the share of any Such partner under the provisions of clause 22, that such partner shall be only entitled to be paid such amount as may be determined under the provisions of clause 23:5 and not claim a distribution/partition of any of the said immovable properties. 23:7 Nashir, Hamid, Anand, Nihar, Ashok and Djena, as the case may be, whose share is determined on account of Resignation Retirement or Death shall also be paid by the continuing partners a sum equivalent to one and a half .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ignation or Retirement or Death as the case may be. 23:8. Such partner {other than Principal Partners, Ashok and Djena, if she has received payment under clause 23:7} or his representative, as the case may be, whose share is determined on account of death or permanent incapacity shall also be entitled to a sum which as near as possible to the share of profit of and remuneration received by him/her in the last accounting year. In order to enable the firm to make such payment, the firm will take a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

epresentatives in such instalments and over such period as may be mutually agreed upon, and failing such agreement, between twelve and thirty-six months from the date of determination of the share of such parter. 23:10 The payments to be made under clauses 7.8, 23:5, 23:7 and 23:8 shall and constitute a charge on the receipts, profits and assets of the firm, while the payment to be made under clause 23:4 and 23:5 shall constitute a charge on the assets of the firm. Further, the payments to be ma .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tners. 36. Thus, as per clause 23:4 of the Partnership Deed, on the determination of the share of a partner under clause 22, the continuing partners of the firm shall, inter-alia, pay to such partner or his/her representatives, besides the fixed capital standing to the credit of such partner, the amount standing to the credit of his/her current account after adjusting his/her share in the profits of the partnership upto the date of determination of his/her share, after deducting the tax liabilit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

such partner under the provisions of clause 22, such partner shall be entitled to be paid only such amount as may be determined. Under clause 23:5, he/she shall not claim a distribution/partition of the immovable properties/assets described in Schedule-I or Schedule -II to the Partnership Deed, belonging to the firm. Clause 23:7 of the deed provides that the partner whose share is determined on account of resignation, retirement or death, shall also be paid by the continuing partners of the fir .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

welve and thirty six months from the date of determination of the share of such partner. The payments, inter-alia, under Clauses 23:5 & 23:7 shall be and constitute a charge on the receipts, profits and assets of the firm. Further, payments to be made under, inter-alia, clause 23:7 shall be diverted by overriding title to such partner or his/her representatives. 37. Now, in keeping with Sitaldas Tirathdas (supra), it is to be seen whether the present case is one of an overriding charge, so t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

amount over and above the balances of the capital account, the current account and the loan account. This payment consisted of two amounts, totaling to ₹ 3,73,000,899/-, less a deduction for recovery towards his share of his client s balances written off, of ₹ 3,55,728/-. The break-up thereof is as follows: a) An aggregate of the differences between the market value and book value of all the immovable properties of the firm, as discounted by 50% (under clause 23:5) ₹ 4,16,715/ .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

is, that it is explicit from these clauses of the partnership deed, as well as those of the deed of retirement dated 30.09.2009, that the assessee firm was never obliged to apply the amount to be paid to Nihar A Mody, out of its income. Rather, the nature of the obligation is such that it cannot at all be said to be a part of the income of the firm. In fact, it is not at all a case where the income of the assessee was required to be applied to discharge an obligation after the income reached the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

aintained by the assessee and not rebutted by either of the taxing authorities, or even by the ld. DR, that the bills were raised by the assessee-firm much later and the receipt with regard thereto came by even thereafter. The expenditure was not met out after accrual of the income. It is further note-worthy that the amount was payable, irrespective of whether the assessee firm made a profit or not and whether or not the continuing partners, of the firm desired to subsequently continue the profe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

(supra), the income must not be deemed to have reached the assessee, since it was diverted to the retiring partner. Therefore, the case of the present assessee falls squarely within ratio of Raja Bejoy Singh Dadhuria (supra), as considered in Sitaldas Tirathdas (supra). 42. The ld. CIT(A), while deciding the matter against the assessee, has sought to place reliance on Sitaldas Tirathdas (supra). Now, this is evidently in oblivion of the observations made by their Lordships of the Hon ble Supreme .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he bills were raised by the assessee much after the payment was made to the outgoing partner and, obviously, the receipt came even later. 43. There is no denial/rebuttal to the fact, by either of the taxing authorities, or even the ld. DR, that as per the partnership deed, the payment becomes due to the outgoing partner at the event of his retirement/demise. 44. The ld. CIT(A) made an observation that the payment had nothing to do with the services rendered to the clients. In this regard, the as .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the relevant clauses of the partnership deed, as discussed in the foregoing paragraphs, lays it bare that the payment in question is a contractual payment and not at all a gratuitous one. It remains undisputed that the outgoing partner can claim the amount as a matter of right. In this regard, in CIT vs. Crawford Bayley & Co. , 106 ITR 884 (Bom.), similar payments, as the one involved herein, were made to the widows of the deceased partners of the assessee firm. The ITO rejected the claim ma .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s that something self imposed or gratituitous is not allowable. The order under appeal does not advert to and dilate upon this aspect of the matter. 46. The Ld. CIT(A) also observed that the payment in question was a compensation for taking over the share of the outgoing partner by the surviving partners. This, despite the fact that as per the relevant clauses of the partnership deed, the outgoing partner was separately paid towards the balances in his capital account, current account, loan acco .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e decision in CIT vs. V.G. Bhuta , 203 ITR 249 (Bom.), as relied on by the AO. 47. In V.G. Bhuta (supra), the assessee was a partner in a firm. Clause 18 of the partnership deed provided that the firm would not stand dissolved on the death of a partner but the surviving partner or partners would succeed to the shares of the deceased partner. This clause required the surviving partners to pay to the legal representative of the deceased partner, as the price of such share, the following amounts: a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

alia, that the firm would stand dissolved if the surviving partners did not desire to take over the share of the deceased partner and to continue the businesses. The conditions contained in this clause 18 of the deed were similar to those of clause 15 of a later partnership deed drawn up, on the death of the partner. The condition of payment of amount of the share of the deceased partner in the net profits accrued due for a period of one year from the date of his death, under clause 18(c) of the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

observed that these facts clearly indicated, that what was paid under clause 18(c) of the first partnership deed and clause 15 of the second partnership deed was by way of price of the share of the deceased partner. It was held, inter-alia, that clauses 18(c) and 15 of the two partnership deeds respectively put an obligation on the surviving partners to pay certain amounts by way of price of the share of the deceased partner to his legal representative (page 203, placitum A of the report). 50. I .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sed, in the present case, the partnership deed nowhere stipulated that the amount to be paid was to be paid by way of the price of the share of the outgoing partner in the partnership. This is the material point of difference between the facts herein and those attending V.G. Bhuta (supra). To reiterate, in Sitaldas Tirathdas (supra), the Hon ble Supreme Court has enunciated that the true test for the application of the rule of diversion of income by overriding charge, is the nature of the obliga .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ance on the decision of the Mumbai Bench Tribunal decision in S.B.Billimoria and Co. vs. ACIT , 125 ITD 122 (Mum). In that case, the decision of the Tribunal was based on the finding that the dates of retirement of the partners had already been fixed in the partnership deed and that the retirement was, therefore, a pre-determined event. The amounts payable to the retiring partners were a percentage of the subsequent year profits of the firm. As such, the payments were to be made from the subsequ .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ee was a firm of Chartered Accountants. In terms of the partnership deed, there was obligation on the assessee-firm to pay retirement benefits to retiring partners for a period of five years. During the relevant assessment year, the assessee made certain payments to retiring partners and claimed deduction for the same. It was held that there was a diversion of income to the extent of the retirement benefits paid to the retired partners and, therefore, the amount so paid was not includible in the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ision in assessee s own case, wherein Sitaldas Tirathdas (supra) was relied on, to hold that in case by some obligation, income is diverted before it reaches the assessee, the amount is taxable; and that as per the relevant clauses of the partnership deed, there was an obligation and income had been diverted before it reached the assessee and it was not a case of application of income, as in Sitaldas Tirathdas . The Department s appeal was dismissed by the Hon ble High Court. 55 In A.F. Ferguson .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

vs. Imperial Chemicals Industries (India) Pvt. Ltd , 74 ITR 17 (SC), which was relied on by the AO, at the outset, the same is not applicable. Therein, the Tribunal had found that there was no evidence of any agreement regarding the payment in question. It was, therefore, that the claim was disallowed. 58. CIT vs. Travancore Sugars & Chemicals Ltd. , 90 ITR 307 (Ker), was, obviously, wrongly relied on by the AO. In that case, the assessee, a public limited company, carried on the business o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version